Think that student debt is only a college kid’s concern? America’s $1.2 trillion in outstanding college loans has surpassed the country’s $700 billion credit-card bill. That huge liability is a drag on the entire U.S. economy. It’s hardly a coincidence that the number of first-time homebuyers is at a generational low, while student-loan balances are at an all-time high.
Student-borrowing totals have tripled in the past decade, a trend that will probably continue as college costs keep rising. (A typical loan tab for 2013 grads is $28,000.) There are many errors and inefficiencies within the labyrinthine repayment system. Consumers Union, the policy and advocacy arm of Consumer Reports, has been fighting to make repayment easier and has had some success. In March, President Obama proposed the Student Aid Bill of Rights, which should help make student-loan repayments more manageable. Until that happens, you can help yourself by:
- Understanding repayment options. It’s crucial for federal borrowers to pay down debt, and now there’s some help. Some income-based plans limit monthly payments to 15 percent of your discretionary income, and pay-as-you-earn plans cap payments at 10 percent of your discretionary income. Note that lowering your bills could mean paying more over the life of the loan. An extension could be for 10, 20, or even 25 years. But the plans forgive any remaining balance at the end of the repayment period. Compare choices by using the repayment estimator at studentloans.gov.
- Knowing that a default leads to more debt. Default is a reality, especially for many older borrowers, some with loans from more than 20 years ago. Defaulting often results in a doubling of the loan balance because of compounding collection fees and penalties. A federal student loan is considered in default after nine months of nonpayment; private student loans can default even earlier. Most can’t be discharged, even in bankruptcy.
- Asking for deferment or forbearance. If you’re unemployed or underemployed, ask your loan servicer for a deferment application. Military service and at least half-time schooling also make you eligible for deferment. Forbearance is often at the loan issuer’s discretion. Either way, interest usually continues to accrue, increasing the amount you’ll owe once the deferment or forbearance ends.
- Putting payments on autopilot. You’ll receive an interest-rate reduction of 0.25 percent if your federal student-loan repayments are automatically debited from your bank account. But if you consolidate multiple federal student loans, you may have to repay those savings. Loan consolidation information can be found at studentaid.gov.
- Paying it forward. Some federal student loans can be forgiven in part or in full if you make 10 years of loan payments on time and work in an eligible public-service job or for a not-for-profit.
What needs to happen
Consumers Union is urging the Department of Education, the Consumer Financial Protection Bureau, and Congress to protect students who need to settle debt by:
- Improving borrowers’ access to flexible payment plans.
- Creating a clear point of contact for questions and complaints.
- Increasing protections for borrowers with private loans.
This article also appeared in the May 2015 issue of Consumer Reports magazine.